ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is intended to inform the reader about matters affecting the
financial condition and results of operations of Primerica, Inc. (the "Parent
Company") and its subsidiaries (collectively, "we" or the "Company") for the
period from December 31, 2011 to September 30, 2012. As a result, the following
discussion should be read in conjunction with MD&A and the consolidated and
combined financial statements and notes thereto that are included in our Annual
Report on Form 10-K for the year ended December 31, 2011, as modified and
updated by our Current Report on Form 8-K filed with the SEC on May 8, 2012
(together, the "2011 Annual Report"). This discussion contains forward-looking
statements

Table of Contents

that constitute our plans, estimates and beliefs. These forward-looking
statements involve numerous risks and uncertainties, including, but not limited
to those discussed under the heading "Risk Factors" in the 2011 Annual Report.
Actual results may differ materially from those contained in any forward-looking
statements.
This MD&A is divided into the following sections:
• Business Overview

• Critical Accounting Estimates

• Factors Affecting Our Results

• Results of Operations

• Financial Condition

• Liquidity and Capital Resources

Business Overview
We are a leading distributor of financial products to middle income households
in the United States and Canada. We assist our clients in meeting their needs
for term life insurance, which we underwrite, and mutual funds, annuities and
other financial products, which we distribute primarily on behalf of third
parties. We have two primary operating segments, Term Life Insurance and
Investment and Savings Products, and a third segment, Corporate and Other
Distributed Products.
We were wholly owned by Citigroup Inc. (together with its non-Primerica
affiliates, "Citi") through March 31, 2010. In April 2010, Citi transferred the
legal entities that comprise our business to us, and we completed an initial
public offering of our common stock by Citi pursuant to the Securities Act of
1933, as amended and also issued to Citi a $300.0 million note payable
(the "corporate reorganization").
Term Life Insurance. We distribute the term life insurance products that we
originate through our three issuing life insurance company subsidiaries:
Primerica Life Insurance Company ("Primerica Life"); National Benefit Life
Insurance Company ("NBLIC"); and Primerica Life Insurance Company of Canada
("Primerica Life Canada"). Our in-force term insurance policies have level
premiums for the stated term period. As such, the policyholder pays the same
amount each year. Initial policy term periods are between 10 and 35 years. While
premiums are guaranteed to remain level during the initial term period (up to a
maximum of 20 years in the United States), our claim obligations generally
increase as our policyholders age. In addition, we incur significant upfront
costs in acquiring new insurance business. Our deferral and amortization of
policy acquisition costs and reserving methodology are designed to match the
recognition of premium revenues with the timing of policy lapses and the payment
of expected claims obligations.
Our Term Life Insurance segment results are primarily driven by sales and
policies in force, accuracy of our pricing assumptions, terms and use of
reinsurance, investment income, and expenses. In connection with our corporate
reorganization in 2010, we entered into certain reinsurance transactions with
affiliates of Citi (the "Citi reinsurers") and ceded between 80% and 90% of the
risks and rewards of our term life insurance policies that were in force at
year-end 2009 (the "Citi reinsurance transactions"). We continue to administer
all policies subject to these coinsurance agreements. Subsequent to the Citi
reinsurance transactions, the revenues and earnings of our Term Life Insurance
segment initially declined in proportion to the amount of revenues and earnings
historically associated with the book of term life insurance policies that we
ceded to the Citi reinsurers. As we have added new in-force business, our
revenues and earnings have grown from these initial levels. With each successive
period, we expect revenue and earnings growth to decelerate as the size of our
in-force book grows and incremental sales have a reduced marginal effect on the
size of the then-existing in-force book.
Investment and Savings Products. We distribute mutual funds, managed accounts,
annuities and segregated funds. In the United States, we distribute mutual fund
and managed accounts products and variable and fixed annuity products of several
third-party companies. In Canada, we offer our own Primerica-branded mutual
funds, as well as mutual funds of other companies, and segregated funds, which
are underwritten by Primerica Life Canada.
Results in our Investment and Savings Products segment are driven by sales of
mutual funds and annuities, the value of assets in client accounts for which we
earn ongoing service, distribution and advisory fees and the number of fee
generating accounts for which we provide administration functions or retirement
plan custodial services.

Table of Contents

While our investment and savings products all have similar long-term earnings
characteristics, our results in a given fiscal period are affected by changes in
the overall mix of products within these broad categories.
Corporate and Other Distributed Products. Our Corporate and Other Distributed
Products segment consists primarily of revenues and expenses related to other
distributed products, including various insurance products, prepaid legal
services as well as credit information and debt referral services. These
products are distributed pursuant to distribution arrangements with third
parties, except for certain life and disability insurance products underwritten
by NBLIC, our New York life insurance subsidiary, that are not distributed
through our independent agent sales force. In addition, our Corporate and Other
Distributed Products segment includes corporate income (including net investment
income) and expenses not allocated to other segments, interest expense on our
notes payable and realized gains and losses on our invested asset portfolio.
Critical Accounting Estimates
We prepare our financial statements in accordance with U.S. generally accepted
accounting principles ("GAAP"). These principles are established primarily by
the Financial Accounting Standards Board ("FASB"). The preparation of financial
statements in conformity with GAAP requires us to make estimates and assumptions
based on currently available information when recording transactions resulting
from business operations. Our significant accounting policies are described in
Note 1 to our consolidated and combined financial statements included in our
2011 Annual Report. The most significant items on the balance sheet are based on
fair value determinations, accounting estimates and actuarial determinations
which are susceptible to changes in future periods and which affect our results
of operations and financial position.
The estimates that we deem to be most critical to an understanding of our
results of operations and financial position are those related to the valuation
of investments, reinsurance, deferred policy acquisition costs, future policy
benefit reserves, and income taxes. The preparation and evaluation of these
critical accounting estimates involve the use of various assumptions developed
from management's analyses and judgments. Subsequent experience or use of other
assumptions could produce significantly different results.
Accounting Policy Change. Effective January 1, 2012, we adopted ASU 2010-26,
Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts
("ASU 2010-26"), and no longer defer certain indirect acquisition costs or costs
attributable to unsuccessful efforts of acquiring life insurance policies. We
adopted this accounting policy change retrospectively and, accordingly, our
historical results have been adjusted to reflect the adoption on a consistent
basis across all periods presented.
The impact of adoption was as follows:

For additional information regarding this accounting policy change, see Note 1
to our condensed consolidated financial statements.
During the nine months ended September 30, 2012, there have been no further
changes in the accounting methodology for items that we have identified as
critical accounting estimates. For additional information regarding

Table of Contents

critical accounting estimates, see the Critical Accounting Estimates section of
MD&A included in our 2011 Annual Report.
Factors Affecting Our Results
Economic Environment. The relative strength and stability of financial markets
and economies in the United States and Canada affect our growth and
profitability. Our business is, and we expect will continue to be, influenced by
a number of industry-wide and product-specific trends and conditions.
Economic conditions, including unemployment levels and consumer confidence,
influence investment and spending decisions by middle income consumers, who are
generally our primary clients. These conditions and factors also impact
prospective recruits' perceptions of the business opportunity that becoming a
Primerica sales representative offers, which can drive or dampen recruiting.
Consumer spending and borrowing levels remain under pressure, as consumers take
a more conservative financial posture including reevaluating their savings and
debt management plans. The effects of these trends and conditions are discussed
in the Results of Operations section below.
Independent Sales Force. Our ability to increase the size of our sales force is
largely based on the success of our recruiting efforts and our ability to train
and motivate recruits to obtain licenses to sell life insurance. We believe that
recruitment and licensing levels are important advance indicators of sales force
trends, and growth in recruiting and licensing is usually indicative of future
growth in the overall size of the sales force. Recruiting results do not always
result in commensurate changes in the size of our licensed sales force because
new recruits may obtain the requisite licenses at rates above or below
historical levels.
Details on new recruits and life-licensed sales representative activity were as
follows:

Recruiting of new representatives decreased for the three and nine months ended
September 30, 2012 compared with the same periods a year ago. The decrease is
directly attributable to the strong prior year recruiting surge that followed
the announcement of short-term recruiting incentives at our June 2011 biennial
sales force convention. However, new life licenses declined to a lesser extent
than recruiting during the three months ended September 30, 2012 and increased
during the nine months ended September 30, 2012 versus the comparable periods in
2011. The trend in new life license activity was driven by our efforts to
balance the emphasis on recruiting and licensing in both our messaging and
incentive programs. Results were also driven by the introduction of streamlined
life-licensing processes for new recruits.
The size of our life-licensed insurance sales force was as follows:

The size of our life-licensed insurance sales force at September 30, 2012
increased since June 30, 2012 as a result of new representative life-licensing
discussed above.
Term Life Insurance Segment. Our Term Life Insurance segment results are
primarily driven by sales volumes, the accuracy of our pricing assumptions,
terms and use of reinsurance, investment income and expenses.
Sales and policies in force. Sales of new term policies and the size and
characteristics of our in-force book of policies are vital to our results over
the long term. Premium revenue is recognized as it is earned over the term of
the policy and eligible acquisition expenses are deferred and amortized ratably
with the level premiums of the underlying policies. However, because we incur
significant cash outflows at or about the time policies are issued, including
the payment of sales commissions and underwriting costs, changes in life
insurance sales volume will have a more immediate effect on our cash flows.
Historically, we have found that while sales volume of term life insurance
products between fiscal periods may vary based on a variety of factors, the
productivity of our individual sales representatives remains within a relatively

Table of Contents

narrow range and, consequently, our sales volume over the longer term generally
correlates to the size of our sales force.
The average number of life-licensed sales representatives and the number of term
life insurance policies issued, as well as the average monthly rate of new
policies issued per life-licensed sales representative, were as follows:

The average monthly rate of new policies issued per life-licensed sales
representative declined during the three months ended September 30, 2012 in
comparison to the prior year period primarily due to the post-convention
recruiting surge that generated significant sales referrals and opportunities in
the third quarter of 2011.
Pricing assumptions. Our pricing methodology is intended to provide us with
appropriate profit margins for the risks we assume. We determine pricing
classifications based on the coverage sought, such as the size and term of the
policy, and certain policyholder attributes, such as age and health. In
addition, we utilize unisex rates for our term life insurance policies. The
pricing assumptions that underlie our rates are based upon our best estimates of
mortality, persistency and investment yields at the time of issuance, sales
force commission rates, issue and underwriting expenses, operating expenses and
the characteristics of the insureds, including sex, age, underwriting class,
product and amount of coverage. Our results will be affected to the extent there
is a variance between our pricing assumptions and actual experience.
• Persistency. Persistency is a measure of how long our insurance policies
stay in force. As a general matter, persistency that is lower than our
pricing assumptions adversely affects our results over the long term
because we lose the recurring revenue stream associated with the policies
that lapse. Determining the near-term effects of changes in persistency is
more complicated. When persistency is lower than our pricing assumptions,
we must accelerate the amortization of DAC. The resultant increase in
amortization expense is offset by a corresponding release of reserves
associated with lapsed policies, which causes a reduction in benefits and
claims expense. The reserves associated with any given policy will change
over the term of such policy. As a general matter, reserves are lowest at
the inception of a policy term and rise steadily to a peak before
declining to zero at the expiration of the policy term. Accordingly,
depending on when the lapse occurs in relation to the overall policy term,
the reduction in benefits and claims expense may be greater or less than
the increase in amortization expense and, consequently, the effects on
earnings for a given period could be positive or negative. Persistency
levels will impact results to the extent actual experience deviates from
the persistency assumptions used to price our products.

• Mortality. Our profitability is affected to the extent actual mortality
rates differ from those used in our pricing assumptions. We mitigate a
significant portion of our mortality exposure through reinsurance.

• Investment Yields. We use investment yield rates based on yields available
at the time a policy is issued. For policies issued in 2010 and after, we
have been using an increasing interest rate assumption to reflect the
historically low interest rate environment. Both DAC and the reserve
liability increase with the assumed investment yield rate. Since DAC is
higher than the reserve liability in the early years of a policy, a lower
assumed investment yield generally will result in lower profits. In the
later years, when the reserve liability is higher than DAC, a lower
assumed investment yield generally will result in higher profits. These
assumed investment yields, which like other pricing assumptions are locked
in at issue, impact the timing but not the aggregate amount of DAC and
reserve changes. Actual investment yields will impact net investment
income allocated to the Term Life Insurance segment, but will not impact
DAC or the reserve liability.

Reinsurance. We use reinsurance extensively, which has a significant effect on
our results of operations. Since the mid-1990s, we have reinsured between 60%
and 90% of the mortality risk on our U.S. term life insurance policies on a
quota share yearly renewable term ("YRT") basis. In Canada, we previously
utilized reinsurance arrangements similar to the U.S. in certain years and
reinsured only face amounts above $500,000 in other years. However, in the first
quarter of 2012, we entered into a YRT reinsurance arrangement in Canada similar
to our U.S. program that

Table of Contents

reinsures 80% of the face amount for every policy sold. YRT reinsurance permits
us to set future mortality at contractual rates by policy class. To the extent
actual mortality experience is more or less favorable than the contractual rate,
the reinsurer will earn incremental profits or bear the incremental cost, as
applicable. In contrast to coinsurance, which is intended to eliminate all risks
(other than counterparty risk of the reinsurer) and rewards associated with a
specified percentage of the block of policies subject to the reinsurance
arrangement, the YRT reinsurance arrangements we enter into are intended only to
reduce volatility associated with variances between estimated and actual
mortality rates.
The effect of our reinsurance arrangements on ceded premiums and benefits and
expenses on our statement of income follows:
• Ceded premiums. Ceded premiums are the premiums we pay to reinsurers.
These amounts are deducted from the direct premiums we earn to calculate
our net premium revenues. Similar to direct premium revenues, ceded
coinsurance premiums remain level over the initial term of the insurance
policy. Ceded YRT premiums increase over the period that the policy has
been in force. Accordingly, ceded YRT premiums generally constitute an
increasing percentage of direct premiums over the policy term.

• Benefits and claims. Benefits and claims include incurred claim amounts
and changes in future policy benefit reserves. Reinsurance reduces
incurred claims in direct proportion to the percentage ceded. Coinsurance
also reduces the change in future policy benefit reserves in direct
proportion to the percentage ceded while YRT reinsurance does not
significantly impact benefit reserves.

• Amortization of DAC. Amortization of DAC is reduced on a pro-rata basis
for the coinsured business, including the business reinsured with Citi.
There is no impact on amortization of DAC associated with our YRT
contracts.

• Insurance expenses. Insurance expenses are reduced by the allowances
received from coinsurance, including the business reinsured with Citi.
There is no impact on insurance expenses associated with our YRT
contracts.

We may alter our reinsurance practices at any time due to the unavailability of
YRT reinsurance at attractive rates or the availability of alternatives to
reduce our risk exposure. We presently intend to continue ceding approximately
90% of our U.S. mortality risk on new business and approximately 80% of our
Canadian mortality risk on new business.
Net investment income. Term Life Insurance segment net investment income is
composed of two elements: allocated net investment income and the market return
associated with the deposit asset underlying the 10% reinsurance agreement we
executed in connection with our corporate reorganization. Invested assets are
allocated to the Term Life segment based on the book value of the invested
assets necessary to meet statutory reserve requirements and our targeted capital
objectives. Net investment income is also impacted by the performance of our
invested asset portfolio and the market return on the deposit asset which can be
affected by interest rates, credit spreads and the mix of invested assets.
Expenses. Results are also affected by variances in client acquisition,
maintenance and administration expense levels.
Investment and Savings Products Segment. Our Investment and Savings Products
segment results are primarily driven by sales, the value of assets in client
accounts for which we earn ongoing management, service and distribution fees and
the number of fee generating accounts we administer.
Sales. We earn commissions and fees, such as dealer re-allowances, and marketing
and support fees, based on sales of mutual fund and managed account products and
annuities. Sales of investment and savings products are influenced by the
overall demand for investment products in the United States and Canada, as well
as by the size and productivity of our sales force. We generally experience
seasonality in our Investment and Savings Products segment results due to our
high concentration of sales of retirement account products. These accounts are
typically funded in February through April, coincident with our clients' tax
return preparation season. While we believe the size of our sales force is a
factor in driving sales volume in this segment, there are a number of other
variables, such as economic and market conditions, that may have a significantly
greater effect on sales volume in any given fiscal period.
Asset values in client accounts. We earn marketing and distribution fees (trail
commissions or, with respect to U.S.

Table of Contents

mutual funds, 12b-1 fees) on mutual fund and annuity assets in the United States
and Canada. In the United States, we also earn investment advisory fees on
assets in the managed accounts program. In Canada, we earn management fees on
certain mutual fund assets and on the segregated funds for which we serve as
investment manager. Asset values are influenced by new product sales, ongoing
contributions to existing accounts, redemptions and the change in market values
in existing accounts. While we offer a wide variety of asset classes and
investment styles, our clients' accounts are primarily invested in equity funds.
Accounts. We earn recordkeeping fees for administrative functions we perform on
behalf of several of our retail and managed mutual fund providers and custodial
fees for services as a non-bank custodian for certain of our clients' retirement
plan accounts.
Sales mix. While our investment and savings products all have similar long-term
earnings characteristics, our results in a given fiscal period will be affected
by changes in the overall mix of products within these broad categories.
Examples of changes in the sales mix that influence our results include the
following:
• sales of a higher proportion of mutual fund products of the several mutual
fund families for which we act as recordkeeper will generally increase our
earnings because we are entitled to recordkeeping fees on these accounts;

• sales of annuity products in the United States will generate higher
revenues in the period such sales occur than sales of other investment
products that either generate lower upfront revenues or, in the case of
managed accounts and segregated funds, no upfront revenues;

• sales and administration of a higher proportion of mutual funds that
enable us to earn marketing and support fees will increase our revenues
and profitability;

• sales of a higher proportion of retirement products of several mutual fund
families will tend to result in higher revenue generation due to our
ability to earn custodial fees on these accounts; and

• sales of a higher proportion of managed accounts and segregated funds
products will generally extend the time over which revenues can be earned
because we are entitled to higher revenues based on assets under
management for these accounts in lieu of upfront revenues.

Corporate and Other Distributed Products Segment. We earn revenues and pay
commissions and referral fees for various other insurance products, prepaid
legal services and other financial products, all of which are originated by
third parties. NBLIC also underwrites a mail-order student life policy and a
short-term disability benefit policy, neither of which is distributed by our
sales force, and has in-force policies from several discontinued lines of
insurance.
. . .